The UK has a number of preferential tax schemes for new innovations. Changes to the R&D tax relief for costs relating to innovations that are not covered by a granted patent (or not yet covered) (‘pre-grant tax relief’) took effect on 1 April. Patent attorney Elizabeth Mills explains how the scheme works, the changes and where to find further information.

 

The changes will see R&D tax relief increased for larger companies, and decreased for smaller companies, so all businesses should review their operations to ensure they are making the most of the scheme.

 

Who qualifies for pre-grant tax relief?

Pre-grant tax relief largely relies on the provisions provided via R&D tax credits. 

 

There are different types of R&D tax credit available. These different types depend on the size of your company and whether the innovation concerned originates from a subcontract or not.

 

For the purposes of the following, a company is considered to be an SME when the company:

  • Has fewer than 500 staff members; and
  • Has either a turnover of under €100 million or a balance sheet total under €86 million.

 

SME status may be affected by external investors and connected companies (e.g., companies to which your company holds over 50% voting rights, or companies that hold over 50% voting rights in your company).

 

Although the different schemes will be discussed in more detail below, to be able to benefit from R&D tax credit, a company needs to:

  • Be a limited company in the UK that is subject to corporation tax; and
  • Have carried out (and spent money on) qualifying research and development activities.

 

Information on what counts as qualifying research and development activities is contained in Guidance notes on the UK Government’s website which currently states that:

 

The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It cannot be an advance within a social science, like economics, or a theoretical field, such as pure maths.

 

The project must relate to your company’s trade, either an existing one, or one that you intend to start up based on the results of the R&D.

 

To get R&D relief you need to explain how a project:

 

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field

 

Your project may research or develop a new process, product or service or improve on an existing one.”

 

More information on this is provided in the Guidance notes mentioned above.

 

Pre-grant tax relief for SMEs

Chapter 2 of Part 13 of Corporation Tax Act 2009 provides R&D tax relief rates for SMEs. This form of tax relief is largely provided using an SME R&D tax credit scheme, and can be claimed for up to two years after the end of the accounting period to which the claim relates.

 

Under these provisions, tax relief may be claimed in respect of at least some of the costs relating to any of:

  • Employees (e.g., salaries, National Insurance contributions, pension fund contributions);
  • Subcontractors;
  • Software used (e.g., software licence fees);
  • Consumable items; and
  • Clinical trial volunteer payments.

 

Costs that cannot be claimed under this scheme include costs relating to:

  • the production and distribution of goods and services;
  • capital expenditure;
  • the cost of land;
  • the cost of patents and trademarks; and
  • rent or rates.

 

SMEs that have not claimed R&D relief before (and that are not connected to any companies that have claimed R&D relief before) can apply for Advance Assurance. Advance Assurance is used to give companies a guarantee that any R&D claims will be accepted under certain conditions.

 

For qualifying costs incurred from 1 April 2023, the amount of tax relief able to be claimed by SMEs using the SME R&D tax credit scheme will be reduced relative to the pre-1 April 2023 provisions of the scheme. This reduction results from both the SME scheme’s enhancement rate falling and the payable tax credit being reduced. In particular, the SME additional deduction decreased from 130% to 86%, and the SME-sized company credit rate decreased from 14.5% to 10%.

 

More information on this may be found on the UK Government’s website.

 

SMEs may alternatively claim tax relief using the R&D expenditure credit (RDEC) scheme in certain circumstances (e.g., when they have been subcontracted to do R&D work by a large company and cannot claim SME-based R&D relief tax credits). This RDEC scheme is described further below.

 

Pre-grant tax relief for large companies and subcontracted companies

Large companies and companies (whether SME or large) who have been subcontracted to do R&D work by a large company may claim up to 10% in tax relief using the R&D expenditure credit (RDEC) scheme for qualifying R&D work. Current law on the RDEC is contained in Chapter 6A of Part 3 of Corporation Tax Act 2009.

 

RDEC is a standalone credit that is brought into account as a taxable receipt in calculating trading profits. The pre-1 April 2023 rate of RDEC was set at 13% of qualifying R&D expenditure, but increased to 20% for qualifying costs incurred from 1 April 2023.

 

Under these provisions, tax relief may be claimed in respect of at least some of the costs relating to any of:

  • Employees (e.g., salaries, National Insurance contributions, pension fund contributions); and
  • Consumable items.

 

In contrast to the pre-grant tax relief for SME companies, subcontractor expenditure can only be claimed in a limited number of circumstances (e.g., when the subcontractor is a charity, university, etc.).

 

Similar to the SME-specific relief scheme, costs that cannot be claimed under the RDEC scheme include costs relating to:

  • the production and distribution of goods and services;
  • capital expenditure;
  • the cost of land;
  • the cost of patents and trademarks; and
  • rent or rates.

 

More information on this may be found on the UK Government’s website  

 

We can help

Please get in touch for further information about protecting innovation by way of patent.

 

We recommend contacting a specialist tax advisor if you have any questions regarding qualifying and applying for tax relief under any of these schemes.

 

This briefing is for general information purposes only and should not be used as a substitute for legal advice relating to your particular circumstances. We can discuss specific issues and facts on an individual basis. Please note that the law may have changed since the day this was first published in April 2023.

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